Cyprus Mail
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Our View: Restructuring NPLs is key to growth

OUTGOING Bank of Cyprus CEO John Hourican could not hide his frustration on Wednesday when he was asked about the restructuring of non-performing loans (NPLs). It was obvious he was very unhappy with the little progress that had been made and blamed this on the way the whole issue was being presented by the media that were being fed their information by the associations of people with NPLs. He was very blunt on the matter.

“So, I have very little patience for the remarks of associations in general, and I have great sympathy for individuals in distress who come and talk to us because we absolutely want to help, but what we cannot have is these general remarks about bad banks doing bad things to good people because that is not the case,” Hourican said.

He had a point, as the politicians and the media, ever since the government submitted the foreclosures bill to the legislature about a year ago, have been saying that the banks would repossess people’s houses and leave thousands homeless. The political parties tried to limit the powers of the bill by passing additional laws, but when the latter were deemed unconstitutional they suspended the implementation of the foreclosures law. All this was done, supposedly, to protect the people from the bad banks.

Many bought this narrative and many borrowers exploited it, using it as an excuse not to repay loans or restructure them. This was the main cause of Hourican’s frustration, saying that “we need to start driving up the behaviour of our borrowers,” and bluntly warning that “banks will not recover and this country will not recover unless we get back into the habit of meeting our obligations, when we borrow money.”

While nobody could disagree with his diagnosis, many have been claiming that the banks are far from helpful when negotiating the restructuring of loans. It has been reported that they impose very high interest rates and hefty charges, which does not facilitate the servicing of a loan. Nobody knows whether this is the norm or just the experience of some customers, but there is a general view among businesses that the banks are not as helpful as they could be when restructuring loans.

Some argue this was because the banks wanted to sell their NPLs to third parties – a law sanctioned by the troika would allow them to do so, when approved – as this would greatly improve their balance sheets. Knowing that the NPLs could be sold, the banks did not have a big incentive to show more flexibility in the restructuring of loans.

This is one of the theories, but it is very difficult to say whether it is the actual case. What should be clear by now is that without the problem of NPLs being tackled, one way or another, the banks will not fully recover and, as Hourican said, “there will be no credit to feed wealth creation.”

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